The Insolvency and Bankruptcy Code (IBC), 2016, Moratorium and Section 138 NI Act : Understanding the Interplay

When cheques bounce and debts mount high, IBC shields the corp, but directors can’t fly. Section 138 NI Act, a vicarious bind, Liability lingers, like debts left behind.

Key Legislations Involved

IBC (Insolvency and Bankruptcy Code, 2016) and Section 138 of the Negotiable Instruments Act, 1881 are two important laws in India dealing with financial disputes.

• Section 138 of the Negotiable Instruments Act, 1881 specifically deals with cheque bounce cases, making it a criminal offense if a cheque is dishonoured due to insufficient funds.

Understanding the Interplay Between IBC and Section 138

To understand the relevance between these two provisions, let’s read Section 14 of the IBC, which has been discussed briefly below.

Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC): Moratorium

When a Corporate Insolvency Resolution Process (CIRP) is initiated against a corporate debtor, a moratorium is imposed. During this period:

• No new suits or proceedings can be initiated against the corporate debtor.
• Ongoing suits or proceedings against the corporate debtor are stayed.
• No recovery of property belonging to the corporate debtor can be made.
• No enforcement of security interest over the assets of the corporate debtor can be done.

Purpose

The moratorium provides a breathing space for the corporate debtor to restructure and resolve its debts without the pressure of creditor actions.

Core Legal Question

Now, the key question that arises is whether moratorium under IBC, which primarily ensures providing a period of calmness to the CD and applies to civil and recovery proceedings, extends to cheque dishonour proceedings or not?

Landmark Judgment Clarifying the Issue

The P. Mohanraj & Ors. vs M/s Shah Brothers Ispat Pvt. Ltd. (2021) 6 SCC 258 judgment is a landmark case that clarifies the applicability of the moratorium under Section 14 of the Insolvency and Bankruptcy Code (IBC) to proceedings under Section 138 of the Negotiable Instruments Act.

Key Points From the Judgment

• The Supreme Court held that the moratorium under Section 14 of the IBC applies to proceedings under Section 138 of the NI Act against the corporate debtor. This means that during the moratorium period, no new proceedings can be initiated, and ongoing proceedings will be stayed against the corporate debtor.
• However, proceedings under Section 138/141 of the NI Act can continue against directors or natural persons in management or control of the corporate debtor, even if the corporate debtor is under moratorium.
• The court characterised proceedings under Section 138 of the NI Act as quasi-criminal, with the primary objective of enforcing civil liability through criminal procedure.
• The judgment amplified the ambit of Section 14 of the IBC, allowing the scope of moratorium to cover proceedings instituted under the NI Act against the corporate debtor.
• The ruling promotes a more seamless process of insolvency resolution by protecting the corporate debtor’s assets during the moratorium period, while also holding natural persons accountable for their actions.

Illustrative Example

Suppose a company, XYZ Pvt. Ltd., issues a cheque that is dishonored due to insufficient funds. Before the notice period for the dishonored cheque expires, a moratorium is imposed on XYZ Pvt. Ltd. under Section 14 of the IBC.

Legal Effect of the Moratorium